Ric Edelman: Investors are Nervous about Political Leaders and Wall Street

This is part two of a six-part series probing the concerns of American investors, as expressed to top financial advisors.

Ric Edelman, Fairfax, Va.-based founder and executive chairman of Edelman Financial Services, says investors tend to be nervous about retirement because there’s a “lack of confidence in the country’s political leaders and in Wall Street.”

Beyond those specific financial security concerns that “reflect the times we live in,” investors have typically been worried about not being able to work forever and having their health decline with age, according to Edelman.

Edelman says once people’s thoughts turn to financial security concerns, they tend to “realize that the money they will be accumulating will be essential for their preservation of lifestyle, and if they make a major mistake, they may not have the time to recover from that mistake.”

That “nervousness” – which is “common regardless of income or net worth” – is “healthy” because it motivates people to take the time to make decisions that could affect their financial security upon retirement, according to Edelman.

On a scale of one to 10 – with 10 being the most secure – Edelman says clients who see him for the first time typically feel they are in the four-to-six range in terms of financial wellness but they are often in “much better shape than they feel.”

Here are the top three financial security-related questions Edelman is asked by his clients, and how he answers them:

#1 Will I have enough money to retire?

“This is why we need to go through the financial planning process. It’s a simple question but it requires a fairly significant amount of analysis to arrive at a reliable answer.

We have to take into consideration a great many factors about the client’s circumstances about how much money they believe they will need each year in retirement, how many years before they plan to retire, how many years they plan to live in retirement, what their income sources will be -- which is typically a combination of pensions, Social Security and investment income; sometimes there are inheritances that can be reliably anticipated. We need to look at their life expectancy and if they are married, the joint life expectancy of both partners.

There’s an answer that we can give them in 30 seconds that will be a ballpark estimate. If they give us two hours in a one-on-one meeting, we can give them a more accurate analysis. If they give us two weeks, then we can give them a detailed, comprehensive projection that is highly reliable.”

#2 When should I begin to take Social Security retirement benefits?

“What seems to be a very simple question is actually very complicated because of Social Security rules. You are allowed to receive benefits as early as age 62, and the majority of Americans start taking their benefits at that age. That’s a big mistake for most people because when you begin to take benefits at age 62, you receive less than your full retirement benefits. Your full retirement benefit isn’t obtained until age 66 or thereabout. It depends on your actual birth date. Somewhere between 65.5 and 67 is when you’re entitled to full retirement benefits. If you take the benefit prior to the full retirement age, then you will receive less than your full monthly benefit. And it grows about 8% per year. In other words, if you delay your benefit to age 63, you’ll receive per month 8% more than what you would have received at age 62. And every year you wait, your benefit would be 8% higher than it would have been the prior year. There is a tremendous value in waiting for many people.

The key is whether you can afford to wait and what your marital status is and what is the age difference between you and your spouse and whether both of you earned income because the Social Security calculations are based on all of these factors. There are also complications when you have children under the age of 16, if you are a widow or if you are divorced. It can be a very complicated analysis to determine the ideal time for you to begin taking your benefits. There’s one other factor and that’s whether or not you’re still working. Depending on how much you earn and your age, many of your Social Security benefits could be subject to taxes or a clawback by the Social Security Administration.

For all these reasons, you need to ask this question by your late 50s so you have plenty of time to plan so that you’re not forced to begin to take benefits sooner than would be in your best interest.”

Ric Edelman

#3 How should my money be invested?

“Many investors get this wrong. There’s an assumption by many people that the older they are, the more conservatively they should be investing. And while that concept is essentially correct, many people apply it at far too young an age. Most people would agree that a 60-year-old should invest more conservatively than a 30-year-old on the theory that the 60-year-old will need the money sooner than the 30-year-old.

But many people take that basic concept and conclude that as a 60-year-old, they should have very little money in stocks, if any. And that’s an incorrect conclusion. We have to recognize the impact of longevity. And due to exponential technologies, people are expected to live far longer than most people realize. Meaning, a typical American consumer would probably say they would live to their 80s or 90s when in fact they are probably going to live in their 100s and 110s.

That means their money needs to last much longer than they’re anticipating and that means they should remain invested in stocks to a much heavier degree for longer than they realize. We find that many Americans are making the mistake of investing too conservatively rather than investing too aggressively.”

Edelman Financial Services was co-founded by Ric Edelman in 1986. The firm currently has around 164 advisors that serve more than 37,000 individuals and families from 43 offices coast-to-coast. The firm also provides 401(k) plans and institutional investment management for businesses. The firm says it had around $22.3 billion in client assets as of June.